Personal Finance: Stocks

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Describe Return to equity and how the measures can be used to inform investment decisions

A return on equity is the profitability ratio that measures the ability of a firm to generate profits from its shareholders investments in the company. In other words, the return on equity ratio shows how much profit each dollar of common stockholders' equity generates. A return on equity that is consistently high shows that a strong pattern of growth. It shows that a company can manage itself well. A return on equity ratio of 15% is a good one generally.

What are the common mistakes made by stock investors?

Acting on tips: Acting on those suggestions without investigating. Getting Sentimental: falling in love with a stock. Forgetting taxes and commissions. Failing to diversify: putting eggs in one basket. Losing patience: feeling down when nothing happens to stocks right away. Buying a penny or microcap stock: this is trouble because a low priced stock is a tip to a troubled company.

What types of investors would be interested in: Blue chip stock

Blee Chip Stocks are generally industry-leading companies with top-shelf financial credentials. They tend to pay decent, steadily rising dividends, generate some growth, offer safety and reliability and are low-to-moderate risk. These stocks can form your retirement portfolio's core holdings-- a grouping of stocks you plan to hold "forever" while adding other investments to your portfolio.

Describe Book value (shareholder's equity) and how the measures can be used to inform investment decisions

Book value is the difference between the company's assets and its liabilities. Book value per share is the number that most investors are interested in. Normally, the price of a company;s stock is higher than ts book value, and stocks may be recommended as cheap because they are selling below book value. May be selling below book value because company shows little promise and you would have to wait a long time for profits to materialize. You need to look at other signs to confirm this bargained price. Also, stay away from companies whose price is too far above book value per share.

Why is information key when choosing stocks?

Company market: general information about the company and how they benefit society; company size, clientele, popularity, companies leadership. Profit: is the company making profit? Company History: Earning reports, spending history (earnings history and outlook). If the company is a maturing tech company, can it sustain the heady growth o its days as a young growth company? Competitors: who are the competitors and how are they doing in comparison. Also: Companies 10-k and 10-q annual reports. * this information would come from share values and news articles.

What types of investors would be interested in: Cyclical stock

Cyclical stock's fortunes tend to rise and fall with those of the economy at large, prospering when the business cycle is on the upswing, suffering in recessions. Automobile manufacturers are a prime example, which illustrates the important fact that these categories often overlap. Other industries whose profits are sensitive to the business cycle include airlines, steel, chemicals and businesses dependent on home building.

What types of investors would be interested in: Defensive stock

Defensive stocks are theoretically insulated from the business cycle (& therefore lower in risk) because people go right on buying their products and services in bad times as well as good. Utility companies fit here (another overlap) as do companies that sell food, beverages and drugs.

Describe Dividend yield and how the measures can be used to inform investment decisions

Dividend Yield is for long term investments. It is the company's dividend expressed as a percentage of the share price. If a share of stock is selling for $50 and the company pays $2 a year in dividends, its yield is 4%. in addition to generating income for shareholders, dividends are a good indicator of the strength of a company compared with its competitors. A history of rising dividends is evidence of a strong company.

Describe Earnings per share (EPS) and how the measures can be used to inform investment decisions

EPS is the company's bottom line-- the profits earned after taxes and payment of dividends to holders of preferred stock. Earnings are also the company's chief resource for paying dividends to shareholders and for reinvesting in business work. The EPS is the portion of a company's profit allocated to each outstanding share of common stock. It serves as an indicator of a company's profitability.

What types of investors would be interested in: Growth stock

Growth Stocks have good prospects for growing faster than the economy or the stock market in general and in general are average to above average risk. Investors buy them because of their good record of earnings growth and the expectation that they will continue generating capital gains over the long term.

What types of investors would be interested in: Income stock

Income stocks pay out a much larger portion of their profits (often 50-80%) in the form of quarterly dividends than do other stocks. These tend to be more mature, slower-growth companies and the dividends paid to investors make these shares generally less risky to own than shares of growth or small-company stocks. Though share prices of income stocks are not expected to grow rapidly, the dividend acts as a kind of cushion beneath the share price. Even if the market in general falls, income stocks are usually less affected because investors will still receive the dividend.

How do you calculate profit or loss from selling a share/shares?

Keep your eye on the total return:Counting dividends and interest as part of your investment return is really the only accurate way to figure it out. But also take into account the commissions and taxes.

Do all companies pay dividends?

Not all companies pay dividends.

Describe Price-earnings ratio (P/E) and how the measures can be used to inform investment decisions

P/E is the price of a share divided by the company;s earnings per share. You want to look for companies with P/E ratios lower than other companies of the same industry. High P/E stocks carry the risk that if the earnings of a company disappiunts investors, its share could drop quickly. Investors do not expect low P/E stocks to grow rapidly and they are less likely to desert the company. However a low P/E is not automatically a sign of good value. look at the trailing P/E (previous 12 months' earnings) and the future-earnings estimate.

What is preferred stock?

Preferred stock is a share of ownership. The difference between preferred stockholders and common stockholders is that preferred stockholders get first dibs on dividends in good times and on assets if the company goes broke and has to liquidate. Theoredically, the price of preferred stock can rise or fall along with the ommon but in reality it does not move nearly as much because preferred investors are interested minly in the dividends, which are fixed when the stock is issued. So, preferred stock is more comparable to a bond than to a share of common stock. Preferred stocks generally pay a slightly lower yield than the same company's bonds and are even less safe. Their potential equity kicker has been largely illusory. Preferred stock is really better suited for corporate portfolios because a corporation does not have to pay federal income tax on most of the dividends it receives from another corp.

How do share prices go up and down?

Share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people want to sell a stock than price goes down Depending on if and when the company is successful or is "perceived" as being successful.

What is common stock?

Shares entitling their holder to dividends that vary in amount and may be missed, depending on the fortunes of the company. (basically shares).

What types of investors would be interested in: Speculative stock

Speculative stocks may be unproven young got-coms or erratic or down-at-the-heels old companies exhibiting some sort of spark, such as the promise of an imminent technological breakthrough or a brilliant new chief executive. Buyers of speculative stocks have hopes of making big profits. Most speculative stocks do not do well in the long run, so it takes big gains in a few to offset your losses in the many. Risk here is high.

What are the indicators that suggest that you may want to sell a particular stock?

The Fundamentals change: for a Fortune 500 company (a company many people have not heard of) if the fundamentals start to weaken it is time to reconsider investment. The dividend is cut: this shows signs of trouble. You reach your target price: a good target is to double or triple money.

Describe The beta (price volatility) and how the measures can be used to inform investment decisions

The beta calculates the expected return of an asset based on its beta and expected market returns A stock with a beta of 1.5 historically rises or falls half again as much as the S&P index A stock with a beta of 0.5 is half as volatile as the index and it would be expected to go up 5% if index rose 10% The higher the beta the bigger the risk

What other factors effect the values of stock (p.7)?

The company's industry is on the rise, the company is a leader in its industry or the company invests in research and development.

Describe Debt equity ratio and how the measures can be used to inform investment decisions

This shows how much leverage, or debt a company is carrying. Ex: $1 billion in shareholders' equity and $100 million in debt the ratio is 0.1 or 10%. Don't consider a company that has more than about 35% of shareholders equity.

If you decide to use an adviser, how can you tell if they are any good or not?

To find out about advisers and whether they are properly registered, read their registration forms called the "From ADV".

What types of investors would be interested in: Value stock

Value stocks earn the name when they are considered under-priced according to several measures of value. A stock with an unusually low price in relation to the company's earnings may be dubbed a "value stock" if it exhibits other signs of good health. Risk here can vary greatly.

Describe Re-investing dividends and whether it would be a good investment strategy to employ? why or why not?

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